Convexity theory for the term structure equation

Details Convexity theory for the term structure equation Convexity theory for the term structure equation

2007-02-15

arxiv.org/abs/math/0702435v1

Mathematics

Analysis of PDEs

Scientific paper

We study convexity and monotonicity properties for prices of bonds and bond options when the short rate is modeled by a diffusion process. We provide conditions under which convexity of the price in the short rate is guaranteed. Under these conditions the price is decreasing in the drift and increasing in the volatility of the short rate. We also study convexity properties of the logarithm of the price.

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